Cost pressure on Turkish inflation increases due to exchange rate

Turkey’s consumer prices increased by 2.13% in October, while annual inflation was realized as 11.89%. Our expectation was 2.10% monthly and 11.90% annually, and the economists who participated in the Bloomberg survey expected an inflation rate of 2.15% on a monthly basis and 11.97% annually. Incoming data are in line with expectations… We observe that the effect of the exchange rate increase on October inflation rates has a more meaningful reflection.

Turkey’s consumer prices increased by 2.13% in October, while annual inflation was realized as 11.89%. Our expectation was 2.10% monthly and 11.90% annually, and the economists who participated in the Bloomberg survey expected an inflation rate of 2.15% on a monthly basis and 11.97% annually. Incoming data are in line with expectations… We observe that the effect of the exchange rate increase on October inflation rates has a more meaningful reflection.

If we look at the sub-items of inflation; It seems that almost all of the subgroups have increased. Items that increased the most on a monthly basis; Clothing and footwear with 6.81%, food and non-alcoholic beverages with 3.03% and household goods with 2.45%. These items increased more than the headline CPI. Transport, miscellaneous goods and services, and housing prices also rose by about 2%. Annual food inflation, which accelerated from 13.5% to 15% in September on an annual basis, reached 16.5% in October, remained above the targeted level. Despite the low oil prices, the energy group showed a high increase by 2.09% in October due to the increase in FX rates.

Core inflation, which excludes volatile items such as food and energy, continues its upward trend. While the C indicator increased slightly below the general CPI increase with an increase of 1.92% in October, it reached 11.5% on an annual basis. We expect the lagged effect of the exchange rate, which mostly affects core inflation and PPI, to reflect on the general price increases in the upcoming period and to continue the upward pressure on the CPI.

For October inflation, we expected to see the effect of the exchange rate increase on prices. The headline CPI increase above 2% indicates that the effect from the exchange rate is now affecting consumer prices. At the same time, however, TRY continues to depreciate and import-based costs continue to rise. The high increase in PPI seems to have continued in October as a result of the increase in foreign exchange-based import costs. As a matter of fact, with the monthly PPI increase of 3.55%, the annual PPI is well above the CPI with 18.2%. The rapid depreciation of TRY after October will cause additional cost pressures on inflation. Therefore, high PPI increases will result in high CPI increases as they reflect the costs undertaken by the producer to the consumer side in the following months. We see the first effects of the exchange rate increase due to foreign exchange-based input costs in the PPI, and its reflection on the CPI takes place through a delayed mechanism. However, depending on the magnitude of the exchange rate shock and the general inflation trend, this period of transition may vary.

The Central Bank continues its additional tightening moves after the meeting on October 22 that it did not hike the policy rate. On the other hand, the depreciation in TRY has not stopped, but continues. The continuation of the depreciation of TRY will further increase the inflation risks. Taking into account the additional risks arising from inflation, the Central Bank updated its 2020 expectation to 12.1% in the Inflation Report, moving it to a point in line with the market expectation. This is a very significant upward revision compared to the 8.9% expectation in the previous Inflation Report and 10.5% in the New Economy Program announced just a month ago. Of course, the Central Bank does not target the exchange rate directly, but the deteriorating trend in inflation, which will continue to deteriorate, is the most important result of the exchange rate increase. Therefore, in order to control inflation expectations, it is necessary to prevent exchange rate increase first. For this reason, we think that the Central Bank, which announced new liquidity measures almost every day, should evaluate the parameters created by the exchange rate increase while deciding on the next policy move at its planned meeting on November 19.

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